Question

On October 15, 2018, our company sells to a retailer located in Austria 12,000 units of a product at a sales price of €30 per unit, and we require payment in Euros (€). The exchange rate on the date of sale is $1.24:€1, and the due date for payment is January 15, 2019. To mitigate the risk of exchange rate fluctuations between the sale date and the collection date, on October 15, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to deliver €360,000 on January 15, 2019, while we lock in the $US we will receive on that date at the forward rate of $1.28:€1 (i.e., the forward rate on October 15, 2018 for settlement on January 15, 2019). Assume this derivative qualifies as a fair value hedge, and our company’s functional currency and reporting currency is the $US. The following table includes the spot rates, forward rates, and related values of the accounts receivable and forward contract on October 15, 2018, December 31, 2018, and January 15, 2019. When computing fair values, ignore discounting.

		FC Accounts Receivable			Derivative—Forward
Date	Spot Rate ($US = €1)	Carrying Value	Change in Carry Val.	Forward Ratea ($US = €1)	FV Asset (Liability)b	Change in FV
October 15, 2018	1.24	$446,400		1.28
December 31, 2018	1.35	486,000	$39,600	1.36	$(28,800)	$(28,800)
January 15, 2019	1.39	500,400	14,400	1.39	(39,600)	(10,800)

^a For settlement on January 15, 2019

^b Ignore discounting in the computation of fair values.

a. Prepare the journal entries to record the sale and all adjustments required for the accounts receivable and forward contract at October 15, 2018, December 31, 2018, and January 15, 2019.

Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero).

Answer 1

Journal entries to record the sale and all adjustments required for the accounts receivable and forward contract are: